D-BOX Technologies (TSE:DBO) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, D-BOX Technologies Inc. (TSE:DBO) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for D-BOX Technologies

What Is D-BOX Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 D-BOX Technologies had CA$6.81m of debt, an increase on CA$4.46m, over one year. However, it also had CA$4.09m in cash, and so its net debt is CA$2.73m.

How Strong Is D-BOX Technologies' Balance Sheet?

According to the last reported balance sheet, D-BOX Technologies had liabilities of CA$12.9m due within 12 months, and liabilities of CA$2.28m due beyond 12 months. On the other hand, it had cash of CA$4.09m and CA$7.91m worth of receivables due within a year. So its liabilities total CA$3.14m more than the combination of its cash and short-term receivables.

Since publicly traded D-BOX Technologies shares are worth a total of CA$20.9m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

D-BOX Technologies has a very low debt to EBITDA ratio of 1.2 so it is strange to see weak interest coverage, with last year's EBIT being only 0.21 times the interest expense. So one way or the other, it's clear the debt levels are not trivial. Notably, D-BOX Technologies made a loss at the EBIT level, last year, but improved that to positive EBIT of CA$119k in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is D-BOX Technologies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, D-BOX Technologies saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Both D-BOX Technologies's conversion of EBIT to free cash flow and its interest cover were discouraging. But its not so bad at managing its debt, based on its EBITDA,. When we consider all the factors discussed, it seems to us that D-BOX Technologies is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for D-BOX Technologies you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.